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October 2, 2013

Why Facts Trump Feelings in Financial Planning: Russell’s Noonan

Too many clients, and their advisors, have been lured recently by the ‘siren song’ of hot returns

It might sound like a takeoff of a Robert Frost poem, but Tim Noonan isn’t about flowery prose when it comes to investment returns.

“I call it the fork in the road, and which way advisors will encourage clients to go,” says Noonan, managing director of capital markets insight with Russell Investments and author of Someday Rich. “As investors are coached back into the market, will they resume the program in progress, or will it be something completely different?”

He argues for the latter, and adds advisors will be winners with a “fact-based approach.”

By that he means retirement planning has been sold by financial services companies as a “feeling or a mood” (think commercials of couples sitting on the beach watching the sunset), with not enough emphasis on tactical research such as assets and liabilities and stochastic modeling.

“It comes down to fact-based versus feeling-based planning. Fact-based, a thorough examination of what they have and what they need, is what will help clients and make great advisors.”

He notes that polls show strong investor optimism and that clients want to get back into the market, but they don’t know the best way to do it. They’ve gone through three stages since the financial crisis of 2008, which makes them wary and at times even angry. They are:

The world is going to end

The want to re-engage, but have trust issues

They are eternal optimists, forgetting the other two stages

Noonan points to the most recent Financial Professional Outlook, a quarterly survey of financial advisors released by Russell. He notes the large gap between what advisors feel they should be doing and what clients feel their advisors should be doing.

"I laughed out loud at one comment made by an advisor. He said clients clapped too loud for Tinkerbell, and as a result, were more disappointed in market returns than the advisors. This is what happens with feeling-based financial planning, rather than fact-based."

“Too many clients—and their advisors—have recently been lured by the siren song of hot returns,” he concludes. “They think a 25% return or whatever is sustainable, and this is the fork in the road for advisors. They can go with it and say ‘yeah, this is great,’ but they will be having a very different conversation in six months. Instead, they lead the client in another direction, one that prepares for more realistic returns and is fact-based. Too many advisors don’t want to do that, because it involves a radical change in their thinking and the way they do business.”